Summary
All of the import automakers are building plants in the U.S. while the domestics are closing them, how come? Here are three reasons Detroit loses money, while the imports don't.
Analysis
What's difficult to understand is why Detroit's automakers lose billions of dollars making cars and trucks here, while their competitors like Toyota, Honda, BMW, and Mercedes, who also build them here, make a fortune at it.
They're all building new plants or expanding production at the old ones, while Detroit is shutting factories.
General Motors, for example, reported a loss of $39 billion for last year, and my guess is Toyota will have an operating profit approaching $20 billion for its March 31 fiscal year.
Here's my take on the situation.
Rebates: Detroit has to pay buyers to take its products. If you have to pay $3000 to $5000 in rebates and other incentives, there goes profit. For example, if GM sells 4 million cars and trucks and spends $3000 in rebates on each, that's $12 billion in lost profit. Toyota and Honda spend a fraction of that.
Efficiency: The imports I mentioned are building at capacity, while the Detroit companies aren't. Huge costs in this business are the tooling, the factory and the overhead. When you build at capacity you lower the per-vehicle cost. When you aren't, these per-vehicle costs go up. And Detroit is constantly cutting back, closing factories, paying off workers. Any money Detroit makes seems to dissolve in payoffs to workers to quit and go away, or now in billions to the unions to take over medical cars management.
Legacy Costs: Those heritage costs, meaning the costs of supporting former workers who aren't needed, or the army of retirees still on the books. If the Detroit companies were running at capacity these costs wouldn't be as heavy, but since they are always cutting back, the burdens grow except when they pay out huge sums to get workers to go away. The foreign companies have younger people on the payrolls, practically no one retired on pension, and cheaper medical care systems because their employees are nonunion and it's easier to dictate than to bargain.
Is there any answer to this? So far there hasn't been, but we can always hope. Even the three problems mentioned above are just symptoms of the real issue. The car business is still a product-driven business. Customers turned against Detroit's product. After all, if the product is right, you don't have to pay the customer to buy it. Production levels would rise and the producer will operate at capacity. And the heritage costs won't grow because the company will be hiring instead of pushing workers out.
For years the answer in Detroit was cost-cutting: workers, factories, brands. Oldsmobile is gone, Ford is selling Jaguar and Land Rover, Mercury seems doomed. GM would love to be rid of Buick. They already got rid of half of GMAC. Chrysler is trying to put all its brands together, who knows how that is going to work.
Finally, some good news: product is making a comeback. Detroit has long talked about improving quality and their latest product proves they are serious. Even "Consumer Reports" agrees.
However, it takes more than just building a better car or truck. Buyers aren't angry at Toyota, Honda, BMW and Mercedes. They like the cars they bought from the foreigners, so getting people to switch back is almost impossible, or a long year-after-year process, to win customers, (as I detailed in an earlier article,) from the younger generations who don't carry a grudge going back twenty years. Winning them back will take a generation or more, so it means continuing improvement of the product and the marketing too.
GM and Ford are doing better overseas, making profits in Europe, Brazil, China.But they aren't enough. The new contract with the UAW will reduce the heritage costs and even the wage costs as new hires are brought in to replace the higher-paid veterans.
It will be interesting to see if the Detroit executives, for the first time, a mix of seasoned "car guys," and industry outsiders, understand it is the quality and attractiveness of their product that will determine whether their companies live or die. And, if they have the talent to create such vehicles.
